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Simplifying defined contribution pension scheme consolidation

The Department for Work and Pensions' (DWP) October 2017 consultation found that the consolidation of defined contribution schemes is onerous. For defined contribution schemes, it requires individual member consents which are difficult, or even impossible, to obtain. Alternatively, an actuary can provide an actuarial certificate to cover the transfer, but many actuaries are unwilling to give this type of certificate as they consider it is inappropriate for defined contribution bulk transfers. Historically, the bulk transfer of pensions legislation was drafted to enable the consolidation of defined benefit schemes.

However, about a third of employers and trustees want to close their defined contribution schemes and transfer members, and their pension savings, to a master trust. Although the new regulation for master trusts is not yet in place, the DWP is keen to facilitate bulk transfers to authorised master trusts and the legislation to allow this applies from April 2018.

For such transfers, trustees of defined contribution schemes can rely on their fiduciary duties alone when deciding whether to agree to the transfer. This would include, for example, taking what advice the trustees decide is appropriate, as regards the transfer, but there are no specific legal requirements. The same type of approach applies where bulk pension transfers are to be made in relation to connected employers, so that they can consolidate their pension arrangements - there is no requirement for the trustees to obtain independent advice.

For any other type of bulk transfer from one occupational pension scheme to another, trustees should seek the advice of a person who is effectively independent of the receiving scheme, and so can provide non-conflicted advice. The individual has to be appropriate adviser as set out in the Regulations.

The Regulations do not provide a statutory discharge for trustees, so it remains important that they go through the right processes when deciding whether to implement a bulk transfer.

Investment changes

The Regulations recognise that a change of scheme can also mean a change of investments for members’ pension savings. They provide that members’ pension savings, that are protected by the charge cap in one pension scheme (due to the scheme having to comply with auto-enrolment), should still be protected by the charge cap in the new scheme even if that scheme is not being for auto-enrolment purposes. Exceptions apply for members who have moved to a non-default option and so are not subject to the charge cap.

The impact of the Regulations has been extended so that they allow trustees to switch members’ investment choices within an existing occupational DC scheme without member consent in limited circumstances, even if no bulk transfer occurs. This applies to members who self select their pension scheme investments where the investment may, the trustees feel, no longer be appropriate for the member or where that investment is no longer offered by the scheme on an ongoing basis. The switch can be made where the member has not changed their investment choice within a five-year period.

New guidance for pension trustees

The DWP and the Pensions Regulator will provide high level guidance for trustees on these changes by the end of April 2018. This will cover in particular how to choose an appropriate adviser and what to consider when deciding whether to make a bulk transfer.

What’s not covered?

These changes do not apply to bulk transfers from defined contribution occupational pension schemes that have benefits with guaranteed investment returns, or the option of a guaranteed annuity rate. For these, essentially the actuarial certificate is still required before a bulk transfer can occur. The Regulations also do not cover the situation where an employer may want to combine two or more group personal pension plan arrangements together. These represent real gaps in the legislation as they are both areas where employers can be keen to consolidate their pension arrangements.

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